Recent market volatility has had an outsized impact on traditional asset managers such as T. Rowe Price (TROW), which has seen its assets under management fall as its funds become more biased towards growth stocks. For those looking to diversify their exposure in this space, alternative asset managers such as Ares Management (NYSE: ARES) can do the trick. This article explores why ARES can be an ideal choice for those looking for stable and strong revenue growth, so let’s get started.
Ares Management has been in business since 1997 and has 2,195 employees in more than 30 offices around the world. Its three main lines of business are credit, private equity and real estate, and is the external manager of well-known investment vehicles such as BDC Ares Capital (ARCC) and commercial mortgage REIT Ares Commercial Real Estate (ACRE). ).
Although ARCC and ACRE both have a higher return, ARES compensates for this with the regular fee income it generates through the management of these and other investment funds. Currently, ARES has $325 billion in assets under management, spread across the aforementioned major asset classes.
Unlike equity mutual funds, which are subject to daily market fluctuations and investor redemptions, which often occur at difficult times when the market is down, ARES benefits from long-term tied up capital. This allows it to create value for investors over the long term.
This is reflected in ARES’ impressive 12% annualized growth in assets under management over the past decade. As shown below, this growth is expected to reach a CAGR of 15% over the next 4 years, driven by annual growth among teens in North America, Asia Pacific and Europe.
ARES maintains its impressive growth trajectory as global investors have shown an appetite for reliable income and superior returns in the liquid stock market with less volatility. This is reflected in strong retention from existing investors, who accounted for 90% of its direct capital raising in the first quarter of 2022. This helped drive a 57% increase in ARES AUM on a to $325 billion, and expense-related earnings grew at a slightly faster rate of 59% over the same period, reflecting positive operating leverage through scale.
Going forward, ARES should see new avenues, especially as its share of the total addressable market remains tiny at just 0.4% of the $91 trillion worldwide, as shown below.
Additionally, near-term growth could be supported by robust planned infrastructure spending as well as global wealth management, as noted on the recent conference call:
We believe that global infrastructure needs will be significant over the next decade, driven by population and economic growth, the increasing privatization of infrastructure assets, the global energy transition and the shift to sustainable and digital infrastructure. The team is integrating well, we are having positive fundraising discussions and expect to have more to tell you in the next quarter.
We believe our infrastructure debt business is uniquely positioned to meet the need for capital in this space by offering a variety of credit solutions across all sectors and geographies. We continue to grow our Ares Wealth Management Solutions business which we believe is the second largest wealth distribution platform owned by an alternative manager. The group now has over 105 professionals and we are looking to expand our geographic reach into new overseas markets and build capacity.
Risks for ARES include the potential for near-term recession, which could reduce returns from its investment vehicles and slow growth in assets under management. Meanwhile, ARES maintains a strong BBB+ rated balance sheet. This supports its dividend yield of 3.4%, which is covered by a payout ratio of 94%, based on Q1’22 EPS of $0.65.
Notably, ARES’ dividend has more than doubled since the end of 2018, from $0.28 to $0.61 per quarter, and I don’t see the pace slowing as analysts forecast EPS growth of 24 to 39% over the next 4 quarters starting in the third quarter. .
As such, I consider the current share price of $72.71 with a forward PE of 22.5 to be justified, given ARES’ track record and growth estimates. Analysts on the sell side have a consensus buy rating, with an average price target of $91. This translates to a potential total return of 29% over one year, including dividends.
Key takeaway for investors
ARES has experienced significant growth over the past decade, and this is expected to continue in the years to come. It is also well positioned to take advantage of the growing global wealth management and infrastructure markets, with less volatility than the stock market. Additionally, it rewards shareholders with a fast-growing, covered dividend yield. I believe ARES is a compelling long-term investment at current levels.